Organic Beer and the Economics of Information

In economics information plays a pivotal role in the efficiency of markets.  One of the assumptions that underlies the result that free markets are Pareto efficient (i.e. maximize total welfare) is that there is full and complete information.  What this means in a product market (among other things) is that consumers know everything there is about a product and can therefore value it appropriately before you buy.  I have blogged about this in terms of beer - highlighting the fact that with a new beer you don't really know until you try how much you value a particular brew.   But this general principle applies in many areas, you might value locally sourced ingredients and be willing to pay more for them at a farmers market for instance, or you might prefer to buy milk from cows that are not given growth hormones.  But you don't know unless you are told whether produce is local or milk is BGH free.  [And by the way this has nothing to do with whether milk from BGH free cows is better or healthier, only if consumers value it differently - but presumably consumers value it differently because they believe there is a difference or some positive probability that there is a difference]

So suppose you value products that are Organic and therefore decide to buy a Deschutes Green Lakes Organic Ale.  This is a beer that is considered organic per the USDAs guidelines.  Ah but wait, it turns out that it is only the malted barley that is grown organically, the hops, according to current USDA rules are allowed to be used in non-organic form in an organic beer (apparently one of only three whole crops thus allowed).   Jeff at Beervana has a nice follow-up blog post explaining the organic rules and the exception.  The justification for this exception for hops is that there are currently too few organic hops being grown (apparently they are very difficult to grow 100% organically).  The irony is that a main reason there are so few hops grown organically probably has a lot to do with the exception itself.  If you can call a beer organic that uses non-organic hops, there is little reason to try and get organic hops and little reason to try and grow them.

Business wise, this is frustrating to organic hop growers - a USDA ruling ending the hops exception would be huge, it would instantaneously create a massive demand.  Economically speaking, the exception creates a market failure for the reasons I mention above.  I am a pretty enthusiastic craft beer enthusiast and until I read Jeff's post I had no idea of the hops exception so I am willing to bet that most consumers don't know either.  This means they cannot accurately value the beer they buy and a sub-optional market outcome results.

Brewer Matt Swihart of Double Mountain commented on Jeff's post and added that:

In terms of ethicality, I've always felt it disingenuous to label a beer 100% organic when made with conventional hops. It is misleading the consumer as hops are grown under substantial pest pressure while barley is a reasonable "soft" crop to grow in that conventional farming of barley requires very little pesticide and nitrogen use. Organic barley and conventional barley have very similar environmental footprints...

So it is possible that it is really hops that matter when consumers are looking for and choosing to buy 'organic beer.' [As an aside, consumers might like organic because they like the idea of limiting chemical applications in the environment, in which case Matt's analysis is correct, or they might like it because they think it is a healthier alternative, in which case I am not so sure as hop vines might be treated before they flower and thus the flower itself might not have any chemical residue whereas barley might retain the residue.  Anyone know?]

Now there is a way forward without the USDA.  If brewers started using organic hops and labeling their beer as 'made with all-organic barley and hops' this might start to alert consumers to the difference and might spur demand for organic hops. As an economist there are few things as universal as the fact that more information is better for the efficiency of markets, so I support any effort to provide more accurate information about all goods.

As a parting note, Matt also points out that:    

"...brewing is carbon positive. Growing the hops and barley for beer produce more carbon than consumed in the production of the crops and the beverage. What a beautiful thing. Save the planet! drink a beer!"

I don't know if Matt is including transportation and refrigeration in this, but who cares? It id another good reason to have a beer.  And by the way, if you haven't had Double Mountain beer - what the heck is wrong with you?  Matt's beers are sublimely crafted and his commitment to the highest quality ingredients is evident in the beer.  Go find some.

Growing Your Own - the Final Hop Update

Well fresh hop season is upon us, time for the wonderfully fecund crop of volatile beers - good and bad - made from fresh (as opposed to dried) hops. I have only had Oakshire's so far, so I gotta get moving. But my dream of making my own from my home-grown hops has been shattered by my failings as a horticulturalist. My problem stems from my assumption that any growing vine must be
as hearty as a weed and thus not in need of any special attention. Ur...no.

My real problem was poor soil and so after growing quickly to about a foot, it just stopped. I was patient, but eventually realized it was a failure to thrive and needing of nutrients. Massive doses of compost restarted it and obsessive watering and tending got it moving but too late. It has now stalled out at about 8 feet and no flowers.

The picture above is my best attempt at pretending it is a towering plant. I was told not to expect much of a harvest the first year, but I had hoped for some flowers. Alas.

Speaking of growing your own, I finally had a Chatoe Rogue Single Malt Ale made entirely of Rogue's own home-grown barley and hops.  As it only uses one type of malt and one type of hops I didn't expect much - brewers love to blend lots of ingredients generally.  But I was surprised to find that it was a delightful beer: simple, straightforward and very quaffable.  I highly recommend it both as a pean to the local food movement, but also as a great beer in its own right.  And Rogue apparently knows a lot more about growing hops than do I.

As far as fresh hop ales go, I am looking forward to trying Rogues, as well as the standard setting Full Sail Lupulin and Double Mountains Killer Green.

If you want to know where to find fresh hop beers in Portland, use Bill's Fresh Hop Map and contribute when you find an undiscovered one.  

Beer Stimulus

"While Japan and the U.S. think up new ways to combat risks of deflation, Germany is banking on its own 200-year-old solution: Beer. Lots of beer."

So begins Brian Blackstone's Wall Street Journal article on the economic impact of Octoberfest in Germany.

Saturday marks the start of the 17-day celebration of Munich’s Bicentennial Oktoberfest (though it has been canceled 24 times in the last two centuries for disease and wars). It’s a boon for the city: by UniCredit economist Alexander Koch’s count it adds about one billion euros to Munich’s economy, or roughly 2% of its GDP via money spent on beer, food, shopping, hotels and transportation.

Last year, over 6.6 million liters of beer were sold (and presumably consumed) at Munich’s Oktoberfest. That was in the early days of Germany’s recovery from a severe recession, and consumption was up smartly from 2008, though still considerably below 2007’s record of nearly seven million liters.

The research on which this article is based is from UniCredit and is a good read.

And they are pretty excited about the pro-inflationary effects of beer as well:

But wait, inflation is bad right?  Well, actually a little inflation (2 to 3 percent) is a sign of a healthy economy and Germany's current one percent rate is a little too low.

Ah the wonders of beer, and it tastes good too!

Economist's Notebook: Creative Destruction, Shut-Down Conditions and Roots

I figured I'd put this in the Beeronomics sphere as well as the Economist's Notebook as beer is one of the beverages of choice among collegge students: A new NBER paper [HT: Freakonomics] reports that drinking in college impairs performance.  From the abstract:

This paper examines the effect of alcohol consumption on student achievement. To do so, we exploit the discontinuity in drinking at age 21 at a college in which the minimum legal drinking age is strictly enforced. We find that drinking causes significant reductions in academic performance, particularly for the highest-performing students. This suggests that the negative consequences of alcohol consumption extend beyond the narrow segment of the population at risk of more severe, low-frequency, outcomes.

Uh oh. This should come as no surprise to anyone who has ever been, or been exposed to, college students: students drinking alcohol is common and the effects of alcohol (as most college students will tell you) impedes their academic performance.

But look more closely at the abstract to understand just what it is the authors are doing in this paper, and the actual story becomes less less clear.  The authors took data from the US Air Force Academy where underage drinking is not tolerated and can lead to immediate expulsion and compared the performance of students just before their 21st birthdays and the performance of students just after their 21st birthdays.

So it is not the alcohol itself the authors are isolating, but the entire change in lifestyle and time management that happens when students turn 21. The authors claim that the USAFA data are a source of strength, but I actually see it as a major weakness.  With such a tightly controlled campus, 21st birthdays may traditionally be a moment of liberation, not just to drink alcohol but to become more social off campus and perhaps less serious on campus.  Now, I imagine that they have a control group for comparison of students who didn't drink prior to age 21 and who don't drink after turning 21, but this is not really a counterfactual because not drinking may also signal a rejection of the entire post-21 lifestyle of which I speak.  [I don't have access to NBER working papers through OSU]

This is just another problem of identifying causality that always happens with social data: is it the alcohol that impedes performance or the behaviors correlated with alcohol?  I suspect both.

Another point is that students are maximizing utility functions that include academic performance, social performance and just plain fun.  Many students recognize the tradeoffs inherent in drinking, and in socializing in general, with academic performance and make their own decisions about where their optimum point lies.  The question then is do they accurately estimate the effect of alcohol consumption on academic performance or do they not understand the deleterious effects?  If the former, than there is nothing to say unless there are significant social costs. If the latter, than we need to understand these effects and transmit the knowledge to students. Unfortunately, I don't think this paper does this.

Finally, the other important question is if there really are significant social costs.  Underage drinking has many by the way, which is why we prohibit it, but I am talking here only of the effect on academic performance.  Well, there are social returns to education so if alcohol impairs individual performance, it should also have a social impact as well, as a less well educated population is less productive.  But how significant are these costs is an important question and one we don't have the answer to.

So it is an important research agenda, but a tough causal link to uncover.

Nanobrewing

Nanobrewing is a hot topic around Stumptown these days.  For lack of an official definition I shall define it as brewing commercially on a very small brewing system (less than 3bbl, say).  Here are two examples of recent write ups on nanobrewing from Angelo at Brewpublic and Jeff at Beervana (and yes, I am going with the one word rather than nano brewing which should at least have a hyphen everyone!).  And it makes sense that it is: there are a large number of homebrewers and beer enthusiasts in the city (and the world for that matter) most of whom, at some point, have had dreams of starting their own business in brewing.

But commercial brewing is a capital intensive business and it is hard to get started without a pretty big wad of cash, even a relatively small 10bbl brewhouse can cost around $150,000 and that's before all the costs associated with installation.  So it makes sense that nanobrewing is appealing.

The economics of brewing are unchanged however and the per-unit costs of brewing on a nano system are very high.  To be a bit pedantic, the average cost per unit of a product is total cost (TC) divided by output (Q).  In brewing, total cost is made up of both variable and fixed costs.  The variable costs (VC) are costs that depend on output - the more beer you make the more labor, ingredients and energy you use.  Fixed costs (FC) are the costs that don't change as output changes - the cost of the brewing equipment and the building (unless you reach your present capacity and need to expand).

So TC = FC + VC.  ATC, which is basically your per ounce cost of beer.  Note that ATC=TC/Q which means that ATC= FC/Q + VC/Q.  In the second term on the left, both the numerator and the denominator are increasing in output so this can either rise or fall with Q (for argument's sake lets call it constant), but the first term ALWAYS falls with Q.  Voilá, this then is an increasing returns to scale industry.  Increasing output will ALWAYS  end up lowering your cost of beer.

Now the reality is that AVC can rise as well, especially when you get really really big.  It gets harder and harder to manage large enterprises, supply chains, etc.  My colleague Vic Tremblay has estimated though that the economies of scale are only exhausted at 2.5 million barrels a year, which is massive.  So the basic economics are undeniable - bigger is cheaper in brewing.

So where does that leave nanobrewing? Basically as a foot in the door.  If there is intense enough local demand for craft beer and enough beer nuts out there who will go off in search of nanobrews, some local bottle shops and pubs that will serve nanobrews, and a robust enough demand to be able to charge premium prices, then I suppose it can be a way to try and build up some funds to pay for future expansion.  If any place does, Portland certainly meets the above criterion.  I mean a city that can support Alan Sprints' passion for 17 years could certainly support a nanobrewery or three. But I agree with Jeff, nanobreweries are just a stepping stone - even those who think they will remain small, will soon find the tide of economic forces carrying them along.

But the good news is that very little has to be ventured so that even if it is lost, not much damage will be done.  And the local market for craft beer, already an embarrassment of riches, may get even more interesting.